Why Real Estate Limited Partnerships May Be Better than REITs

There are a few different real estate investment options available to investors. Two common ones are Real Estate Limited Partnerships and Real Estate Investment Trusts (REITs). If you are comparing these two options, here’s a look at why real estate limited partnerships may be better than REITs.

What are REITs?

REITs work much like mutual funds. REITs are typically traded in the stock market, making it a fairly liquid investment option. Each consists of 100 or more shareholders. No combined 5 shareholders may own more than 50% of the total. 75% or more of the assets are invested in real estate while the remaining may be invested in a number of other options.

Equity and Mortgage REITs

REITs invest in either physical assets or mortgages. Physical assets include commercial properties (malls, office buildings, warehouses, and hotels) or residential complexes such as apartment buildings. Properties are purchased and often held for income producing potential, although they can certainly be sold for profit and to the benefit of investors. For mortgages, they either lend out mortgage funds or purchase existing mortgages in the secondary mortgage market. REITs may specialize in a type of real estate or in a specific region of the country.

Dividend Payouts

At least 90% of earnings from REITs must be paid out to investors in the form of dividends. Many REITs will yield 10% or more in dividends, on average. Investors normally have the option to reinvest those dividends back into the REIT.

What Are Real Estate Limited Partnerships

Real Estate Limited Partnerships are a fairly new option in the marketplace. In the case of Homes, Inc., we source and bundle distressed properties for each of our partnerships. Investors own a stake in physical assets, deeded to the partnership.

Properties are purchased, fixed, and sold for a short life cycle of about 12 months. Properties generally appreciate over 23% post-renovation. Assets yield about 10% on average, paid out as dividends to investors. As an investor, you have decision-making power when it comes to real estate limited partnerships. It allows you to play a more active role in your investment.

Why Real Estate Limited Partnerships May Be Better than REITs

Real estate limited partnerships and REITs both give you the opportunity to diversify your investment portfolio by participating in the real estate market and receiving dividends. However, their structures are quite different in other respects.

REITs are bought and sold much like stocks. Thus, they are more of a passive investment option. Earnings are also more limited as they primarily involve recurring rental income or mortgage interest earnings, depending on the specific REIT.

Real estate limited partnerships, on the other hand, allow you to play a more active role in your investments. Depending on the specific properties selected, there is also the potential for a greater upside when properties are sold for profit. These partnerships are focused on high returns and short life cycles, ideal for most investors looking for cash flow.